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US-China Tire Spat Unlikely to Trigger Trade War

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US-China Tire Spat Unlikely to Trigger Trade War

Published September 14, 2009

WASHINGTON (AP) -- China's complaint Monday over new U.S. tariffs on Chinese tires raised pressure on Washington but isn't likely to incite a full-blown trade war. Each side knows its economy has too much to lose.

The United States, the world's largest economy, represents a huge market for Chinese exports. And China is the largest holder of U.S. government debt at a time when the federal deficit has swollen to record levels because of economic rescue measures.

China quickly took its case to the World Trade Organization after President Barack Obama ordered steep increases in U.S. tariffs on Chinese tires for three years, including by 35 percent in the first year.

For China, barriers on its exports to the U.S. mean job losses at home. Still, private economists say they expect both sides to avoid a conflict that would harm producers in each country.

"The big message from China to the United States is think twice, think three times before repeating this kind of relief for a U.S. industry because if you do this again, we are going to hit you again," said Gary Hufbauer, a trade expert at the Peterson Institute, a Washington think tank.

In a speech Monday in New York, Obama defended his decision to impose the tire tariffs. Chinese imports represented almost 17 percent of the U.S. tire market last year and have been blamed for the loss of thousands of American jobs.

The White House said Obama acted under a provision in the U.S.-Chinese agreement on Beijing's accession to the World Trade Organization that lets Washington slow the rise of Chinese imports to give time to American industry to adjust.

In response, Beijing filed a complaint with the WTO, triggering a 60-day process in which the two sides will try to resolve the dispute through negotiations. If that fails, China can ask for a WTO panel to investigate and rule on the case.

In the meantime, the conflict creates a potential irritant as Washington and Beijing prepare for a summit of the Group of 20 leading economies in Pittsburgh on Sept. 24-25 to discuss efforts to end the worst global downturn since the 1930s.

And it adds to a series of disputes over poultry, auto parts and other goods that have threatened to strain relations as Beijing and Washington cooperate on complex issues including the economic crisis, climate control and North Korea.

News of the WTO filing sent Asian markets down 2 percent, but investors appeared to take a less dire view of the dispute as the day wore on. European stock markets declined, but U.S. markets posted modest gains.

Investors appeared to be concluding that each economy relies too heavily on the other to risk a damaging trade war. On Monday, for example, shares of AES Corp., which develops and distributes electrical power, hit a one-year high on a report that China's investment arm is interested in buying a stake.

The Wall Street Journal, citing people familiar with the matter, reported that a possible investment by China Investment Corp. is part of a discussion aimed at building an alliance between China's sovereign wealth fund and the Virginia power company.

Rhetorically, though, Beijing turned up the heat.

The U.S. tariffs are "a serious case of trade protectionism, which China resolutely opposes," said a deputy commerce minister, Zhong Shan, quoted by the official Xinhua News Agency.

Beijing's response to the U.S. tariff decision shows the urgency communist leaders attach to maintaining exports, employment and social stability. Officials have said up to 30 million laborers lost factory jobs last year as exports plummeted. Many have found new employment, but the government is eager to avert more job losses.

Chinese leaders are sensitive to public anger, easily triggered by suggestions that foreign nations are treating China unfairly. Frustration over the tire tariffs has been fanned by news reports citing a rubber industry group that said up to 100,000 jobs could be affected, with losses to Chinese producers topping $1 billion.

But the decision to go through the WTO could reflect China's desire to confine the dispute and prevent it from disrupting relations with Washington.

Beijing has sometimes retaliated in disputes with the United States in the past by slowing or breaking off talks on other matters. But now, the two are cooperating on an array of issues they both deem critical.

Tires imported from China are usually low-end models. While American-made, name-brand tires can easily run more than $100 apiece, Chinese imports sometimes sell for half that. The tariffs would make them more expensive.

The two major American tire makers, Goodyear and Cooper, should not be heavily affected. Goodyear says less than 2 percent of the tires it sells in North America come from China. Cooper brings in a higher share from China, but it also sells cheaper tires and stands to benefit from the higher tariffs on the competition.

The U.S. imported about 46 million tires from China last year, three times as many as in 2004. In that time, China's share of the U.S. market went from less than 5 percent to almost 17 percent.

The United Steelworkers brought the tire case to the U.S. International Trade Commission in April, and says annual imports should be capped at 21 million. The union says 5,000 American tire workers have lost their jobs since 2004.

After a U.S. panel recommended tariffs, Beijing sent a deputy commerce minister to Washington in August to lobby the White House against the idea.

Obama's order raised tariffs for three years on Chinese tires - by 35 percent in the first year, 30 percent in the second and 25 percent in the third.

On Sunday, Beijing announced it would investigate complaints that American auto and chicken products are being dumped in China or benefit from subsidies. The ministry said the U.S. imports have "dealt a blow to domestic industries."

Steelworkers union president Leo Gerard said the Obama administration's action against China is not protectionism. "Now they're going to have to distribute American tires," he said of U.S. tire sellers. "Nobody's going to lose their jobs distributing American tires."

Written by Associated Press

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